Following a current that has sparked more than a little concern in the newspaper industry, Federated, the largest department store company in the United States, has started to shift spending from newspapers to electronic media such as television and direct mail, a new report from Merrill Lynch asserted on Monday.

In the report, Merrill Lynch warned that the move, combined with reduced spending, could potentially threaten the company's own newspaper industry advertising forecast of 3 percent growth for 2005 and 2006. The spending shift by Federated, whose advertising accounts for roughly $900 million of newspaper ad spending, or 2 percent of newspaper industry ad revenue in total, could help account for the quick reversal in August that sent newspapers' ad revenue heading south after months of steady growth--down 1-2 percent last month, the report said.

Newspaper industry professionals attempted to put the best face on the move.

"Federated made their strategy pretty well-known a long time ago, so no one was particularly surprised," said John Kimball, senior vice president and chief marketing officer at The Newspaper Association of America (NAA).

Last month, the NAA released figures which demonstrated that although newspaper advertisers had increased their spending on newspapers by nearly 3 percent during the second quarter of 2005, most of that growth came from online newspaper advertising sales. However, this was bad news for the still mostly print medium. Total newspaper ad revenues--both print and online--showed only a modest growth of 2.8 percent over the figures from a year before.

Since the outset of September, almost all of the major newspaper chains have posted ad page losses. Knight Ridder Inc., the second-largest newspaper publisher in the United States and parent company of papers such as The Miami Herald, said that declining ad sales would help force its third-quarter earnings down by an estimated 20 percent.

Gannett's national newspaper advertising revenue in August was down 8.2 percent, following a 5.1 percent decline in ad volume. And Chicago Tribune and Los Angeles Times publisher Tribune Co. saw August advertising revenue edge up a fractional 0.6 percent to $234 million, although the Tribune's overall revenue declined 0.9 percent to $428 million.

Despite the disheartening news, some still maintained that there was room for optimism.

"I think what we're seeing is some progress in some areas where newspapers are making inroads, slight though they might be," said John Kimball. "In specialty retailing, for instance, it would appear that there's a marketplace there that's being untapped. Newspapers individually are also working very hard with advertisers in their own marketplaces that may not have traditionally been seen as such."